Analysis

5 Ways Employers Are Botching Staff Cuts During Pandemic

By Vin Gurrieri
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Law360 (October 14, 2020, 7:10 PM EDT) -- As the coronavirus pandemic drags on and federal lawmakers dither over providing economic relief, several big-name employers like Disney and American Airlines have opted to shed thousands of employees.

The head of The Walt Disney Co.'s theme parks arm announced in late September that about 28,000 U.S. park workers would be impacted by a reduction in force, and American Airlines furloughed just over 19,000 employees around the same time, with the airline's CEO mentioning in a Sept. 30 letter to employees that the cuts might have been avoided had Congress and the White House not stalled on a new aid package.

United Airlines also recently furloughed over 13,000 employees, another of the many businesses across industrial sectors that have cut staff in response to the downturn in business caused by the pandemic.

Regardless of whether those employee separations are permanent or temporary, it's easy for employers to get themselves into a legal mess if they don't chart their course carefully, lawyers say.

"It's a much more involved process than a gut check," said Karina Sterman, a partner at Greenberg Glusker Fields Claman & Machtinger LLP. "It's really key to plan this out because you don't want to do it in a way that generates more liability than the money you think you're saving in the first place. The whole reason that you do a layoff is you're trying to save money, [but] if your approach to saving money costs you money, then you need to rethink your approach."

Here, experts look at five common mistakes businesses make when they thin their ranks.

Poor Planning

When businesses are feeling an economic squeeze, reorganization plans can come in different shapes and sizes. Although various terms — reductions in force, layoffs and furloughs — are often used interchangeably to describe staff cuts and generally involve similar legal obligations, there can be slight differences that are important in given situations.

Reductions in force, or RIFs, involve permanent termination of employees' positions, whereas a furlough is a separation generally done with the expectation that a worker will be returned to their position after a certain time period, once the amount of work needed to be performed kicks back up. A layoff lies somewhere in the middle, with workers being indefinitely ousted from their jobs but with a possibility they could be recalled if circumstances change.

"I do think that there is not always a clear understanding of the distinction between furloughs and terminations, and how that impacts things like health insurance or the employment arrangements and compensation arrangements that a company may have," said Gillian Emmett Moldowan, a partner in Shearman & Sterling LLP's compensation, governance and Employee Retirement Income Security Act practice.

Being aware of any specific legal obligations that flow from those distinctions as well as reviewing the plans and programs a company has in place to assess the impact on those contractual obligations is "certainly important," she added.

Reavis Page Jump LLP partner Jill Kahn Marshall also said a common issue that has come up in the context of the coronavirus is companies may not necessarily abide by the terms of their employment agreements when they decide how to manage RIFs and layoffs.

"Just because there's a pandemic and a lot of companies are hurting, that does not invalidate the agreement that they already have in place," Marshall said.

She noted that while many employers are now trying to insert so-called force majeure provisions into basic employment contracts — language that can prevent the contract from having to be fulfilled — it was "rare" for such clauses to have been in those pacts prior to the pandemic. Employment contracts may include language that spells out an employer's financial obligations in the event of a separation or clauses governing the reasons for a worker being let go.

"The issue that I'm seeing is that the employer may have the right to terminate [the employee] without cause, but they also still might be required to pay the employee a certain amount because they're being terminated without cause," Marshall said. "So you can't just throw your hands up in the air and say, 'We can't afford that so we're not going to honor that [provision].' Some companies are doing that, but they're opening themselves up to legal liability."

Bias Reflected in Result

Another common misstep that employers make right off the bat when they embark on a RIF or do furloughs is failing to consider what the workforce will look like afterward — information that should guide their strategy.

That is especially so if the reduction involves a group of employees who perform roughly the same job, according to Sterman, while adding the "real challenge" is "making those individual distinctions and justifications for keeping somebody over somebody else."

"If you're trying to focus as your primary goal on minimizing liability … then what you're going to do is simply follow the formula of last hired, first fired," Sterman said. "Unfortunately, it doesn't always work out that way in practice because skill sets vary, and if you know the people personally, you're going to be aware that someone who's maybe only been with the company for two years is considerably more productive than someone who's been with the company [longer]."

If businesses fail to carefully plan out their staff reduction, what they could be left with is a workforce that looks like it was engineered to get rid of particular groups of people who may be covered under federal and state anti-discrimination law. Older workers, people with disabilities and people of color are but a few examples.

"A big issue that we're seeing is a company might say, 'OK, we are doing this to cut costs, so we're going to focus our eliminations on people who are earning higher salaries.' But people who are earning higher salaries often end up also being some of the older workers in the workforce," Marshall said, homing in on one such example. "So if you have a reduction in force that targets just that population, you might end up disparately impacting older workers, and then you're opening yourself up to potential legal liability."

Sterman for one said it behooves employers to plan for any staff reductions by doing a "demographic analysis" for each affected department.

"Before you get into the actual underlying causes, does it look like you're going to have some explaining to do?" Sterman said. "Does it look like, 'Wow, in a department of 20 people where half are men and half are women, you're only laying off the women.'"

Ultimately, the key for employers is to make sure they're able to articulate "why you chose one person and you didn't choose the other people you could have chosen," Sterman said, adding she makes the companies she represents go through that exercise before finalizing any reductions in staff.

"I make my clients put it into words, because if they can't put it into words, then we need to go back to the drawing board," Sterman said.

Discriminating on the Back End

Bias can sneak into the tail end of the process as well, when companies decide that it's time to bring workers who have been laid off or furloughed back into the fold, lawyers say.

In those situations, just like when choosing whom to lay off in the first place, employers have to guard against bringing back people in a way that discriminates against protected groups, Marshall said.

She pointed out that age and disability are two of the biggest areas where employers can land in hot water, particularly if they make assumptions that workers who fall into those buckets either can't or don't want to come back to work.

"The biggest issue with [bringing] people back to work is going to be disability accommodations, because a lot of people are asking, 'I have an underlying medical condition. Can I have accommodations for COVID?'" Marshall said. "And some companies are trying to get ahead of the ball and possibly only ask back someone that they don't see as being in a high-risk category. But actually, that could put the company at risk."

"It's not up to the company to say, 'This person's older. I bet they don't even want to come back, [so] I'm not going to ask them,'" Marshall added. "They need to ask people without regard for that, and then if people want to raise an accommodation request, that's up to them."

Skipping Past Notice Rules

In addition to making decisions about layoffs that are rooted in illegal bias, businesses also sometimes overlook laws governing how much of a heads-up they must give workers slated for layoffs.

For example, the federal Worker Adjustment and Retraining Notification Act, which covers businesses with at least 100 workers, generally requires businesses to give workers 60 days' advance notice of pending mass layoffs or plant closings. Many states, meanwhile, have their own WARN Act variations that can include slightly different coverage and notification requirements.

"Depending on how large the company is and how many people are impacted, you may need to be in compliance with those laws," Marshall said.

If an employment agreement is in place, Marshall said employees may be entitled to a certain amount of notice that they are being laid off, a requirement that employers can also satisfy if they provide pay "equivalent to the notice period."

No Eye on Benefits

Another area where employers that implement staff reductions may run afoul of their legal obligations is in regard to benefits, which can pose complicated questions about a separated worker's status with the company and entail a different set of notice requirements.

Under COBRA, or the Consolidated Omnibus Budget Reconciliation Act of 1985, group health plans sponsored by employers with more than 20 employees must give workers the choice to temporarily extend coverage that would otherwise end under certain circumstances.

Like WARN Act notices, businesses also have to provide workers with notices under COBRA if the company provides group health insurance, Moldowan said.

Moreover, if employers sponsor group health, Moldowan said they need to cast an eye on how those plans define the term "active employee" to determine whether a person who has been furloughed "would continue to receive benefits as a continuing employee or whether they would be eligible for COBRA."

If workers do receive benefits during their furlough period, businesses then have to check whether those benefits render individual workers ineligible to utilize unemployment insurance under various state-specific eligibility requirements, according to Moldowan.

"So, if you do want to furlough your employees and have them eligible for unemployment, which is common, then you want to be thoughtful about what you're allowing them to receive in terms of compensation and whether that might invalidate their eligibility," Moldowan said.

--Editing by Aaron Pelc and Philip Shea.

For a reprint of this article, please contact reprints@law360.com.

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